HomeTop StoriesThe “Powell Call”: What Do We Need To See For The Fed To Hike Again

February 20, 2019

The “Powell Call”: What Do We Need To See For The Fed To Hike Again

There was significant shock two months ago when Powell made public the Fed’s dramatic dovish reversal, effectively ending the Fed’s rate hiking trajectory and at the same time unleashing a dramatic market rally. But why? Perhaps it has to do with the popular view that the Fed has an advantage in forecasting and in some cases has “inside information”. In fact, as BofA notes, the Fed’s forecasting accuracy is on par with that of market consensus, in other words rather dismal, and swayed more by the market than underlying fundamentals.

To assess the Fed’s forecasting record, BofA looked at two sets of forecasts: the Board of Governors staff forecasts (Greenbooks) and the FOMC’s summary of economic projections (SEP); whereas the academic literature has focused on the former, BofA examines the SEP forecasts from 2009 to the present.

What it found is that when looking at forecasts for real GDP growth, the unemployment rate and core PCE inflation, the forecast errors increased over time across the board (Chart 3). No surprise. The errors are the largest for GDP, which means that the Fed has the poorest record for estimating GDP. Comparing the forecast errors of the Fed vs the Blue Chip and Bloomberg consensus shows that they are comparable. Focusing on GDP, both the Fed and the consensus has underestimated GDP growth one to two quarters out over this recovery but has significantly underestimated growth thereafter (Chart 4).

Naturally, the Fed’s infamous “dots”, or fed funds projection, will be a function of these forecasts. Given the errors in forecasting growth and inflation, BofA notes that investors should be cognizant of the challenges in predicting the rate path.

Fed Chair Powell has been alluding to such, arguing that market participants shouldn’t overemphasize the path of the dots given that they are only modal forecasts. Nonetheless, they are part of the Fed’s communication strategy and will be under the market microscope in this world of enhanced transparency.

Of course, the current episode in which the Fed unexpectedly hit the breaks on its hiking intentions has striking similarities to what happened in early 2016 when the Fed delivered a hike in December 2015 during a period of heighted uncertainty in markets. Shortly thereafter, the markets and economy were hit by the combination of the surprise renminbi devaluation in August 2015, falling oil prices, Brexit and a rapidly strengthening dollar. Indeed, both Powell and Yellen have recently made parallels between the two episodes with Yellen explicitly stating in a recent CNBC interview that “what’s going on now reminds me a lot of 2015/2016.”

The Fed’s communication shifted quickly back then as well: in December 2015, the minutes focused on the improvement in the labor market and strong growth prospects. By March, the Committee underscored that “global economic and financial developments” posed risks. Indeed, the dots went from 4 hikes to 2 hikes for 2016 between the December and March meetings. The rapid shift in Fed guidance prompted many market participants to argue that the Fed was “one and done” (it was merely put on hold for about a year).

The Fed then stuck with this dovish narrative until the April 26-27 meeting where they again signaled that hikes were on the horizon. But market participants were not pleased and further priced out the possibility of a hike. Finally by the summer, the market moved toward pricing in another hike at year-end as shown below.

The move down in market pricing and Fed communication is more extreme today than in 2016 but the lesson learned is that expectations can shift fairly quickly. One should note, however, that in 2016 the Fed was not also engaging in QT, i.e., reducing its balance sheet by up to $ 50 billion per month (if, in reality, the monthly number averages about $ 36 billion).

Which brings us to the big question everyone is asking: what do we need to see for the Fed to hike again?

According to Bank of America, there are three key signals that traders – and the Fed – should be especially focused on:

Get through a few big risk events, most notably the designation of auto import as a national security risk (February 19), the deadline for China/US trade talks (March 1), reinstatement of the debt ceiling and the subsequent negotiations (March 1) and the Brexit deadline (March 29). If a bad outcome is avoided in each case, it will reduce downside risks and make the Fed more comfortable with the outlook.

US data slow but remain at or above trend. After the bad December retail sales report, perhaps the next key data point is the January report (release date has yet to be set by the Census Bureau). One bad number is a fluke, two is a problem.

Global growth also needs to stabilize, particularly in Europe and China.

BofA concludes that if these three factors hold, market conditions will likely remain accommodative, giving the Fed the green light to consider another rate hike. Furthermore, most Fed officials still believe that we are about 50bp away from neutral rates, as suggested by the long-run dot, which means rates can head higher while still delivering the desired soft landing for the economy.

There is also the risk of a “Powell Call”: if, as many know if don’t necessarily vocalize, the Fed is driven mostly by the market, then when the S&P approaches its all time high above 2,800, it is likely that the Fed’s thinking will make another U-turn, and even though Powell does not want to be seen as flipflopping with the market, he will also be cognizant of the risk of reflating the asset bubble, and purely for the sake of equities, may suggest that hikes are again on the horizon, even if the three key catalysts listed above are not all met.

The challenge, of course, will be how to communicate the hawkish shift without once again shocking the markets.

This brings us to the next two events where Powell will address an audience: the Fed’s semi-annual monetary policy testimony to Congress on Feb 26 and 27 followed by the March 20 FOMC meeting. Powell will likely deliver similar comments as in the January press conference. However, as BofA notes, it gets more complicated in the March meeting as that is when the FOMC will have to release an updated SEP, including a new set of “dots”. In December, the dots signaled three more hikes in total but since then Powell has refused to signal the direction of the Fed’s next move. As such the key question is whether the dots move all the way down to zero hikes? To BofA, the answer is “Doubtful.” This means that Powell might have to dance around the signal from the dots, perhaps underscoring that they are just a forecast… one made by mere mortals who get their forecast wrong more often than not…

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Political correctness is….

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Isn’t there a better way to vote?

by Witsnews

Voter fraud is on the rise, the same politicians keep getting elected over & over & over again….and we wonder why nothing ever gets done in Washington. One has to wonder how much of an influence voter fraud and the illegal vote has had on our current political state in this country.

Isn’t it time to change the way we vote, so that our votes actually count, instead of being effectively nullified by voter fraud?

Here are a few suggestions:

Every state should start requiring photo ID and proof of citizenship from every voter. (no-brainer)

Hand stamping procedures or similar tools for verifying one vote per person should be implemented in all states.

Early voting by mail, and absentee voting should be strictly limited to only those cases where legitimate need is proven. “Ballot harvesting”, a favorite among Democrats in California which allows anyone to collect absentee ballots unsupervised, should be outlawed.

Voting machines:

Any state using electronic voting machines should require that the machines provide multiple copy paper receipts showing a date/time stamp, voting location, machine ID number, and list all the candidate choices the voter selected.

One copy remains with the voter who initials all the receipts to verify that the information on the receipts is correct, and one copy goes to a representative of each political party.

After the electronic votes are all tabulated, staff from each political party represented in the election proceed to hand count each and every voter receipt while being monitored by reps from each of the parties. The totals from the hand counts are then compared to the results of the machine tabulations, and all results are immediately released to the public.

If the winners from the machine tabulations match those found from the hand counts from all political parties, then an official winner is declared.

If there is a discrepancy from the hand counts of any of the political parties large enough to show a different winner than what the electronic tabulations showed, then an equal number of staff from all parties represented must combine to do an additional final manual re-count.

The results of this final count determine the official winner. If the electronic tabulations are overruled by the results of the hand counts, all voting machines involved in the process are repaired or replaced immediately.

This is just a short list. There are many other options which should be considered such as increased use of security cameras, volunteer programs to provide proper oversight, legal aid for filing fraud reports, etc.

The future of the republic is at stake here, we have to get this right…and soon.

Socialism is….

When the Muslims Came….

Before:

and After:

When the Muslim refugees came, I didn’t protest….they were just poor refugees.

When they built mosques and Islamic cultural centers, I didn’t protest….they had the right to pray to Allah.

When they demanded only Halal food in schools, I didn’t protest….they can only eat what the Koran allows them to eat.

When they gang-raped women and girls, I didn’t protest…..rapes occur in every culture, and they have nothing to do with Islam.

When they carried out terror attacks, I didn’t protest….it was only a few extremists, who didn’t represent true Islam.

When they demanded Sharia Law zones, I didn’t protest….they needed their own space, and we live in a free country.

When they took their seats in government, I didn’t protest…..they have a right to be represented.

When they introduced Islamic Sharia Law, demanding that it apply to the entire population…….it was too late for me to protest.

The duty of a true Patriot….

Meet the U.S. Congress….

Feminists say….

Do you really want to know?

Worth The Short Read:

“America, The Last Man Standing”

JFK’s Words of Wisdom

Lutheran Minister Richard Wurmbrand On The Threat To Freedom

Russian Novelist And Historian Alexander Solzhenitsyn Cautioned The U.S.

Theodore Roosevelt’s Thoughts On Civilization, America, & The Future

It’s been over seven years. Do you realize that 300 tons of radioactive water from Fukushima is still being pumped into the Pacific Ocean every day? The ocean is dying. Why hasn’t there been more of an international effort to help Japan contain this disaster?

FARMLANDS – Documentary About The Plight Of South African Farmers – by Lauren Southern

Bill Cooper 9/11 Broadcast As It Happened – Maybe The Only Real Truth That Was Heard That Day:

Still believe that two aluminum planes took down three steel skyscrapers in perfect demolition-style free fall, and turned the buildings and their contents into dust…without the assistance of some other type of destructive force? – Where Did The Towers Go? – by Dr. Judy Wood – Hardcover

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In case you were wondering what your country might be like without 2nd Amendment rights, just look at history. Support the NRA – https://home.nra.org/

Slavery, Terrorism & Islam – by Dr. Peter Hammond – Paperback

Western Civilization is
under a full frontal
assault, and the leftists
are the ones holding
the door wide open to
their own demise!

Islam is not a religion,
nor is it a cult. Islam
has religious, legal,
political, economic and
military components.

Islamization occurs when
there are sufficient Muslims
in a country to agitate for
their so-called “religious rights”.

When politically correct and
culturally diverse societies
agree to “reasonable” Muslim
demands for their “religious
rights”, they also get
the other components under
the table.

Here’s how it works:

As long as the Muslim
population remains around 1%
of any given country, they
will be regarded as a
peace-loving minority and
not as a threat to anyone.
In fact, they may be
featured in articles and
films, and stereotyped for
their colorful uniqueness:

From 5% on, they exercise
an inordinate influence in
proportion to their percentage
of the population. They
will push for the introduction
of halal (clean by Islamic
standards) food, thereby
securing food preparation jobs
for Muslims. They will increase pressure on supermarket chains to feature it on their shelves…along with threats for failure to comply:

At this point, they will work
to get the ruling government
to allow them to rule
themselves under Sharia, the
Islamic Law. The ultimate
goal of Islam is to convert
the world, and to establish
Sharia law over the entire
Earth.

When Muslims reach 10%
of the population, they
will increase lawlessness
as a means of complaint
about their conditions. Any
non-Muslim action that
offends Islam will result
in uprisings and threats: